Second Quarter 2020

The Emerging Europe Fund gained 18.05 percent in the second quarter 2020, underperforming its benchmark slightly, the MSCI Emerging Markets Europe 10/40 Index, which gained 18.68 percent. See complete fund performance here.

The fund underperformed its index by 63 basis points due to its defensive positioning. Due to the rapidly growing coronavirus infections in the first three months on the year, the fund increased it cash level in the middle of March. However, emerging European equities bottomed in March and continued to bounce in the second quarter.

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.

Strengths

  • On the country level, the Emerging Europe Fund’s stock selection in Turkey and Russia had the greatest positive effect on fund performance relative to its index. In Turkey, the strategy to underweight banks worked well. In Russia, the strategy to underweight Norilsk Nickel, a metal producer, and overweight Tinkoff Bank, an online Russian bank, worked well. Norilsk Nickel reported a huge oil spill in the Arctic and admitted to dumping wastewater in the wild. Tinkoff, meanwhile, outperformed in the second quarter after its sharp selloff in the first quarter, when Oleg Tinkov, founder of Tinkoff, was charged with filing false tax returns in early March.
  • On the sector level, the fund’s stock selection in financials and material had the greatest positive effect on fund performance relative to its index. As noted above, good bank stock selection in Turkey and Russia worked well. In materials, the strategy to overweight gold producers worked well as did the fund’s underweight of Norilsk Nickel.
  • The top three positive contributors were the fund’s largest Russian stocks. Russian equites outperformed with the price of oil moving higher after a sharp selloff in the first quarter. The price of Brent, the international crude oil benchmark for crude oil, was supported by a global economic recovery as countries eased lockdown restrictions due to the coronavirus pandemic. Moreover, the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC members agreed to extend oil production cuts.
    • Lukoil The integrated Russian oil producer contributed 211 basis points to the fund’s performance. We like Lukoil for its strong cash generation from operations and high dividend yield. We believe Lukoil may outperform with the recovery in oil prices.
    • Gazprom The Russian oil and gas producer contributed 157 basis points to the fund’s performance. We like Gazprom for its commitment to lower its debt level and high dividend yield.
    • Sberbank Russia’s largest bank contributed 133 basis points to the fund’s performance. We like Sberbank for its strong balance sheet and very high return on equity (ROE).

Weaknesses

  • On the country level, the fund’s underweight position in the Czech Republic and exposure to Western Europe had the greatest negative effect on fund performance relative to its index. Not holding shares of CEZ, a Czech utility company, did not work well as the stock gained 31 percent in the second quarter. Emerging European stocks, as measured by the MSCI Emerging Europe 10/40 Index, gained 18.8 percent, while Western European stocks, as measured by the STOXX Europe 600 Index, gained 16.7 percent during the same period. Owning stocks with lower returns hurt the fund’s performance relative to its index, which does not hold Western European stocks.
  • The fund’s stock selection in consumer staples and underweight in utilities had the greatest negative effect on the fund’s performance relative to the index. Stock selection in food retailers was weaker than expected. In utilities, the underweight position in the Czech company CEZ had the worst effect.
  • The top three negative contributors were as follows:
    • Higher cash levels Higher cash levels contributed negative 416 basis points to the fund’s performance. Due to the rapidly growing coronavirus infections in the first quarter, the fund increased its cash level in the middle of March. However, Emerging European equities bottomed in March and continued to bounce in the second quarter. Without a strong signal pointing to certain economic recovery, the fund deployed its cash position gradually in April and May.
    • Currency hedges Currency hedges contributed negative 16 basis points to the fund’s performance. In particular, hedging the fund’s exposure to the Turkish lira was the least beneficial. The U.S. dollar depreciated in the second quarter, pushing emerging currencies and the euro higher as investors slowly became more positive about emerging assets. In the first six months of the year, lira depreciated against the dollar by 13 percent.
    • Bank Polska Kasa Opieki The Polish bank contributed negative 7 basis points to the fund’s performance. Polish banks underperformed after the National Bank of Poland lowered it rates. Moreover, polish banks still have the foreign loan portfolio issue unresolved and might see more lawsuits as polish economy gradually open for business.

Outlook

It was a strong quarter, especially for emerging European equites, which outperformed other emerging markets and Western Europe but lagged the U.S. It is difficult to predict if the recovery will continue at the same pace. With the strong rebound in the second quarter, most markets are back to their levels from February. Performance will depend on positive coronavirus news. If countries continue to reopen their economies, and there is no resurgence in the number of infections, markets may be able to go higher, supported by fiscal and monetary stimulus. Any negative news or additional waves of infection, however, could send stocks lower mid-March levels. Turkish stocks recorded their strongest rebound in the second quarter, and we believe there may be the potential for them to move higher.

 

The MSCI Emerging Markets Europe 10/40 Index 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. The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. It is not possible to invest in an index.

A basis point is one hundredth of one percent, used chiefly in expressing differences of interest rates.

There is no guarantee that the issuers of any securities will declare dividends in the future or that, if declared, will remain at current levels or increase over time. The dividend yield, expressed as a percentage, is a financial ratio (dividend/price) that shows how much a company pays out in dividends each year relative to its stock price.

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity.

Holdings may change daily and should not be considered a recommendation to buy or sell any security. Holdings are reported as of the most recent quarter-end. Holdings in the Emerging Europe Fund as a percentage of net assets as of 6/30/2020: MMC Norilsk Nickel PJSC 3.76%, Tinkoff Bank JSC 0.00%, Lukoil PJSC 6.46%, Gazprom PJSC 7.58%, Sberbank of Russia PJSC 6.57%, CEZ Group 0.00%, Bank Polska Kasa Opieki SA 0.51%.

Net Asset Value
as of 08/05/2020

Global Resources Fund PSPFX $4.97 0.07 Gold and Precious Metals Fund USERX $14.76 0.28 World Precious Minerals Fund UNWPX $5.38 0.08 China Region Fund USCOX $9.43 0.06 Emerging Europe Fund EUROX $5.93 0.08 All American Equity Fund GBTFX $23.87 0.12 Global Luxury Goods Fund USLUX $16.66 0.21 Near-Term Tax Free Fund NEARX $2.26 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change