African and Middle Eastern equity markets produced mixed returns in the second quarter, and dollar strength versus various currencies reduced returns to U.S. investors. Rebounding oil prices helped some Gulf Cooperation Council markets, such as Saudi Arabia and Oman, both of which returned about 6% in dollar terms. Shares in Kuwait and Qatar declined, whereas stocks in the United Arab Emirates were little changed. In northern Africa, Egypt and Morocco produced modest gains, but sub-Saharan markets Nigeria and Ghana dropped more than 11%. South African stocks added about 2%, although the country reported that its economy contracted at an annualized rate of 1.2% in the first quarter.
The Africa & Middle East Fund returned 1.86% in the quarter compared with 1.86% for the S&P Emerging/Frontier ME & Africa BMI ex IL and 2.11% for the Lipper Emerging Markets Funds Average. For the 12 months ended June 30, 2016, the fund returned −20.35% versus −17.24% for the S&P Emerging/Frontier ME & Africa BMI ex IL and −10.14% for the Lipper Emerging Markets Funds Average. The fund's average annual total returns were −20.35%, 3.60%, and −0.49% for the 1-, 5-, and Since Inception (09/04/2007) periods, respectively, as of June 30, 2016. The fund's expense ratio was 1.47% as of its fiscal year ended October 31, 2015.
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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.
Stock selection had little net impact on the fund's relative performance, as good selection in South Africa was offset by relatively weak selection in the UK, where we own some companies with substantial business in Africa and the Middle East. The UK's late-June referendum to leave the European Union triggered significant global market volatility near the end of the quarter. Country allocations also had little net impact on relative performance. Most country allocations did not change much during the quarter. However, we increased our South African underweight versus the benchmark by reducing exposure from roughly 38% to 35% of assets.
Our long-term outlook remains robust, as the region's growth is being driven by attractive demographics, rising urbanization, and increasing levels of infrastructure development, as well as a strong base in natural resources. There is much more to the region than oil, but we are encouraged that governments and businesses are enacting policies to adapt to the new reality of lower oil prices. Many oil-exporting countries, including those in the Gulf region, have been cutting subsidies to fuel, electricity, and gas in an attempt to reduce pressure on public spending. In Africa, oil-importing countries are generally benefiting economically from lower energy costs, and some are implementing reforms to tie fuel costs to the world price of oil rather than using a fixed domestic cost. As always, we would like to remind our investors that this fund has a high risk/return profile. Because of its narrow geographic focus and relatively small number of holdings, this fund can be extremely volatile and should represent only a small portion of a long-term investor's well-diversified portfolio.