Global markets had a mixed quarter. Stocks in Japan posted strong gains, buoyed by expectations that a weakening yen would aid economic growth. U.S. stocks rose modestly, benefiting as the country's safe-haven status and relative economic strength outweighed concern that the Federal Reserve would reduce its bondbuying later in the year. European stocks declined slightly, as the region remained mired in recession, while emerging markets fell sharply, weighed down by negative news from China and a strengthening U.S. dollar.
We focused on finding the best long-term return opportunities worldwide, targeting high free cash flow businesses with strong earnings growth prospects, attractive valuations and management teams aimed at creating shareholder value. This approach led to an underweight in U.S. stocks and overweight in emerging markets, which hurt relative performance. Security selection in the energy and materials sectors accounted for all the Fund's underperformance. In energy, the biggest detractors were exploration and production (e&p) companies Ivanhoe Energy Inc. in Canada and OGX Petroleo e Gas Participacoes SA in Brazil, which are in the early stages of developing their assets. Ivanhoe's stock sank as investors became impatient with the company's lack of cash flow and operating assets, while OGX's shares plunged amid concern over its production growth outlook, balance sheet and parent company's financial problems. Americas Petrogas, Inc. - a Canadian e&p company with assets in Latin America - also fell, hurt by weaker-than-expected productions and some institutional selling. In materials, declining gold prices and rising costs pressured the stock of Canadian gold mining company IAMGOLD Corp.
The Fund picked up ground versus the index in information technology and consumer discretionary. Top contributors included broadcasters Mediaset S.p.A. in Italy and Television Franšaise 1 S.A. in France. Both stocks appreciated on anticipation that advertising spending would increase in Europe.
We're optimistic about prospects for stocks, especially in markets outside the U.S. As interest rates move higher, we expect investors to shift away from large U.S. dividend-paying equities toward more attractively valued securities with strong earnings growth prospects. We expect out-of-favor emerging markets to gain from a growing middle class, while European stocks stand to benefit once economic conditions there improve. We've also boosted the Fund's stake in Japan, focusing on economically-sensitive financials and consumer discretionary stocks.