January 2010

In January, the Eastern European Fund underperformed its benchmark, the MSCI Emerging Europe 10/40 Index.  Czech, Russian and Turkish indices gained, while Hungarian and Polish indices registered losses during the month.

The best-performing sectors in the region were financials and consumer discretionary. Energy and materials were the laggards, and telecommunication services also underperformed.

Strengths

• The fund was overweight consumer discretionary stocks, which delivered strong performance on renewed demand for autos in Turkey and retail expansion in Russia.
• The fund was underweight energy and materials, which were two of the worst-performing sectors during the month as the U.S. dollar regained its strength versus other currencies.
• Financials continued to outperform amid signs of a turnaround in non-performing loan formation and improved net interest margins.

Weaknesses

• Consumer discretionary and consumer staples delivered mixed performance during the month.
• Amid general underperformance among stocks in consumer staples category, Wim-Bill-Dann, a producer of dairy and juice products in Russia, was hit by the shortage of available raw milk and issued a profit warning.
• Profitability of major players in telecommunication services has come under pressure due to heightened competition and changes in the regulatory environment.

Opportunities

• Improved relations between Russia and the U.S. may result in U.S. investors’ improved perceptions of the balance of risks and opportunities in Russia’s stock market.
• Turkey’s long-running negotiations with International Monetary Fund (IMF) may come to fruition in 2010.  The deal would reduce the funds that Turkey’s treasury has to borrow from the market, increase bank lending to the private sector, and create more upside to consensus 3.5 percent GDP growth in 2010.
• Poland is the only European country that managed to avoid recession in 2009 and has the potential to grow at an even faster rate as manufacturing and consumer sentiment picks up.

Threats

• The prospects for economies in Eastern and Central Europe to generate export-led recoveries are tempered by the fact that their currency depreciation has been relatively small compared with previous crises.
• Continued monetary tightening in China would have a cooling effect on the commodity rally, despite current strong demand.
• Turkey is not a member of the eurozone; however, continued euro weakness could affect profitability of Turkish exports to Europe, as raw materials costs are fixed in U.S. dollars.

Past performance does not guarantee future results.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.  The MSCI Emerging Markets Europe 10/40 Index (Net Total Return) is a free float-adjusted market capitalization index that is designed to measure equity performance in the emerging market countries of Europe (Czech Republic, Hungary, Poland, Russia, and Turkey).  The index is calculated on a net return basis (i.e., reflects the minimum possible dividend reinvestment after deduction of the maximum rate withholding tax). The index is periodically rebalanced relative to the constituents' weights in the parent index.  Holdings in the Eastern European Fund as a percentage of net assets as of 12/31/09: Wim-Bill-Dann 1.10%.