Emerging markets stocks slumped as concerns about China reverberated across the commodity and currency markets. Commodities prices plunged to multiyear lows on expectations for lower demand from China, whose economy appeared to be slowing faster than expected, and weighed on the currencies of major exporters such as Russia, Brazil, and South Africa. China's efforts to stem a stock market selloff and its currency devaluation in August also unnerved investors. Nearly all emerging markets currencies weakened against the dollar, amplifying losses in dollar terms. The MSCI Emerging Markets Index ended the quarter at its lowest closing level since 2009.
The Emerging Markets Stock Fund returned −15.70% in the quarter compared with −17.78% for the MSCI Emerging Markets Index and −16.02% for the Lipper Emerging Markets Funds Average. For the 12 months ended September 30, 2015, the fund returned −15.26% versus −18.98% for the MSCI Emerging Markets Index and −19.25% for the Lipper Emerging Markets Funds Average. The fund's average annual total returns were −15.26%, −2.69%, and 3.66% for the 1-, 5-, and 10-year periods, respectively, as of September 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) and roughly neutral with the benchmark in Russia, where we hold a few consumer-driven businesses and no energy names. The fund also holds a few companies in developed Europe that have significant exposure to emerging markets. South Korea and Taiwan are the biggest country underweights due to the lack of attractive growth opportunities. We are also underweight in China, where we believe growth will decelerate in the coming years as the country transitions to a consumer-driven economy. Sector allocations reflect our preference for areas driven by domestic consumption. Consumer staples, information technology, and consumer discretionary were the largest sector overweights at quarter-end. Our largest underweight sectors were telecommunication services, energy, and materials due to a lack of attractive growth opportunities and concerns about commodity prices.
We are optimistic about the long-term outlook for emerging markets despite their underperformance versus developed markets stocks for the past several years. Most emerging markets have stronger financial positions, larger reserves, and more flexible currencies than they did a decade ago. Compared with developed markets, most emerging markets have more favorable demographics and a stronger tailwind from increased consumption by a growing middle class. Finally, emerging markets trade at a significant discount on an absolute and relative basis to developed markets, making valuations compelling for long-term investors. In the near term, we anticipate more weakness as emerging markets countries and companies retrench in response to China's slower growth. We have seen significant dispersion in the returns of emerging markets stocks even within the same country and industry in recent years. We anticipate further divergence in the performance of countries and companies over time.