Fourth Quarter 2016

During the fourth quarter, the Emerging Europe Fund gained 7.8 percent, while the MSCI Emerging Europe 10/40 Index appreciated by 9.39 percent. See complete fund performance here.

Past performance does not guarantee future results. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost.

Russian equities outperformed the MSCI Emerging Europe 10/40 Index, while Hungarian, Greek, Polish, Czech and Turkish bourses underperformed. On a sector basis, energy outperformed while materials, financials, health care, telecommunication services, utilities, staples, industrials and real estate underperformed.

Strengths

  • The fund's underweight of Turkey had the largest positive contributions to the fund's performance this quarter.
  • The fund's stock selection in the financials sector had the largest positive contribution to the fund's performance this quarter.
  • Sberbank, a Russian bank, made the largest single contribution to the performance of the fund.

Weaknesses

  • The fund's underweight of Russia, as well as overweight of Austria and Romania, had the largest negative contribution to the fund this quarter.
  • The fund's underweight in energy, as well as overweight in industrials, had the largest negative contribution to the fund this quarter.
  • Tekfen Holding, a Turkish holding company, was the greatest absolute detractor to the fund's performance during the quarter.

Opportunities

  • The central bank of the Czech Republic expects inflation to accelerate to 2 percent in the third quarter of 2017, and may remove a cap on the koruna. The market has already started to bet on the foreign-exchange regime changing and selling the euro against the koruna as one of the top trades for 2017.
  • The U.S. will start easing its penalties (imposed on Russia over annexation of Crimea in 2014) during the next 12 months, according to 55 percent of respondents in a Bloomberg survey. Without the restrictions, Russia's economic growth would get a boost equivalent to 0.2 percentage points of gross domestic product next year and 0.5 percentage points in 2018. Donald Trump's surprise election in November is feeding expectations of policy change toward Russia.
  • FTSE Index provider classifies Romania as a frontier market and, in September 2016, added it to the watch list for possible promotion to Secondary Emerging Market status. Romania meets eight of the nine "Quality of Markets" criteria required for attaining Secondary Emerging Market status, with recent developments in the infrastructure of the market being received positively by international portfolio investors. The one outstanding criterion is sufficient broad-market liquidity to support a sizeable global investment. Romania may be coming closer to emerging market status.

Threats

  • The European political calendar is full for the next 12 months and could create some political tension. British Prime Minister Theresa May gave March 31 as the deadline for triggering Article 50, which will start the process of Brexit. In April, France will hold presidential elections. A Marine Le Pen victory could create crisis in the European Union area, given her antipathy to this area. It could also promote a more populist, industrial-policy driven agenda. In August, Germany will hold national elections. Angela Merkel announced her decision to run for a fourth term. Her leadership is critical to retain investment confidence in the region. However, her supporters have declined in number due to her immigration policies.
  • The Bank Credit Analyst research team predicts the dollar bull market to stay intact during 2017, with the Trade Weighted Index rising by around 5 percent, which should be negative for riskier emerging Europe assets. The group remains bearish on emerging Europe currencies.
  • The outflow of assets from Turkey could continue next year, and the lira may remain vulnerable to external conditions and political risks feeding into higher inflation. The Turkish economy faces recession risks as the third quarter GDP contracted 1.8 percent on a year-over-year basis, the first contraction since the third quarter on 2009. The coup attempt in July appears to have hurt the economy more than expected.

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, Greece, 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 may change daily. Holdings are reported as of the most recent quarter-end. Holdings are reported as of the most recent quarter-end. Holdings in the Emerging Europe Fund as a percentage of net assets as of 12/31/2016: Sberbank of Russia PJSC 10.47%, Tefken Holding SA 0.66%.

Net Asset Value
as of 02/23/2017

Global Resources Fund PSPFX $5.81 0.08 Gold and Precious Metals Fund USERX $8.78 0.07 World Precious Minerals Fund UNWPX $7.55 0.05 China Region Fund USCOX $8.21 -0.02 Emerging Europe Fund EUROX $6.20 0.02 All American Equity Fund GBTFX $24.59 No Change Holmes Macro Trends Fund MEGAX $19.06 0.06 Near-Term Tax Free Fund NEARX $2.22 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change