Second Quarter 2017

During the second quarter, Emerging Europe Fund gained 3.76 percent while the MSCI Emerging Europe 10/40 Index appreciated 2.5 percent. See complete fund performance.

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.

Greek, Turkish, Hungarian, Czech and Polish equities outperformed the index, while Russian bourses underperformed. On a sector basis, industrials, health care, consumer discretionary, financials and real estate outperformed while consumer staples, utilities, materials, energy and telecommunication services underperformed.

Strengths

  • The fund's underweight of Russia as well as overweight of Greece and Austria had the largest positive contributions to the fund's performance this quarter.
  • The fund's overweight in industrials and stock selection in energy and consumer staples had the largest positive contributions to the fund's performance this quarter.
  • RHI AG, an Austrian construction company, made the single largest contribution to the performance of the fund.

Weaknesses

  • The fund's underweight of Poland had the largest negative contribution to the fund's performance this quarter.
  • The fund's stock selection in financials had the largest negative contribution to the fund's performance this quarter.
  • Sberbank, a Russian bank, was the greatest absolute detractor to the fund's performance during the quarter.

Opportunities

  • Greece agreed with its creditors on a package of reforms needed to unlock its next instalment of bailout cash, avoiding a debt default this summer. The country will receive a total payment of 8.5 billion euros that will be used for debt repayments and clearance of arrears. It could open the door for the European Central Bank (ECB) to start buying Greek government bonds and possibly pave the way for a return to markets.
  • Emanuel Macron's victory in the French presidential election has reduced political tension in Europe and showed that Europe has resisted the populist political tide. His newly formed party, La Republique en Marche, also won majority of seats in the parliament. Next he may focus on enacting his pro-business agenda and renewing relations with Germany. To have the two biggest economies in the eurozone moving in tandem would be a powerful force.
  • According to the Financial Times, nowhere in the world have expectations for growth changed so rapidly and positively as in Central and Eastern Europe (CEE). The consensus forecast for economic growth in the region this year is now 2.5 percent, 0.3 percent points higher. Expectations for 2018 are even brighter at 2.6 percent, 0.1 percentage points higher than forecasts at the start of the year. Stronger-than-expected external demand in Western Europe, a tighter labor market, an attractive environment for foreign investment, government stimulus measures, easy financing conditions and the revival of European Union structural funds are all supporting stronger growth in the region.

Threats

  • The people of Turkey agreed to give President Recep Erdogan extra powers, which will kick in with the next dual parliamentary and presidential elections scheduled to be held in November 2019. Turkish lawmakers elected seven members to a reshaped judicial authority, part of a constitutional overhaul backed by the referendum. Erdogan says that the changes are needed to ensure stability in Turkey, while opposition parties and human rights groups say the reforms threaten judicial independence and push Turkey toward one-man rule.
  • The snap election in the United Kingdom at the beginning of June backfired badly on Prime Minister Theresa May, leaving no party with overall control in Parliament and making Brexit negotiations even tougher. The British pound remained weak over the past year despite good economic performance. Real gross domestic product (GDP) growth has averaged 0.4 percent per quarter over the past year--only a notch below its historical trend. But the currency may remain weakened until there is more progress in the U.K.-EU Brexit talks.
  • The U.S. Senate voted 98-2 for new sanctions on Russia, and the EU extended sanctions on Russia by six months. Moscow will continue to have limited ability to raise capital as European businesses cannot borrow or lend money to Russia's five main state-owned banks for more than 30 days. The sanctions also include an export and import ban on arms sales and limit the country's access to technology that can be used for oil production. In retaliation, Russia extended sanctions on food imports from Europe until the end of next year.

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.

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 6/30/2017: RHI AG (1.24%), Sberbank of Russia PJSC (8.72%).

Net Asset Value
as of 09/22/2017

Global Resources Fund PSPFX $5.82 0.03 Gold and Precious Metals Fund USERX $7.96 0.09 World Precious Minerals Fund UNWPX $6.63 0.05 China Region Fund USCOX $11.42 -0.15 Emerging Europe Fund EUROX $7.00 0.03 All American Equity Fund GBTFX $24.24 0.06 Holmes Macro Trends Fund MEGAX $19.96 0.09 Near-Term Tax Free Fund NEARX $2.23 No Change U.S. Government Securities Ultra-Short Bond Fund UGSDX $2.00 No Change