Annual Report - EuroPacific Growth Fund - American Funds

the system. Currencies of countries withlarge current account deficits postedsome of the sharpest losses. Geopoliticalturmoil added to volatility in emergingmarkets later in the fiscal year amidconcerns about rising tensions betweenRussia and Ukraine, which could last foryears and cause Germany and othercountries to rethink their approach toRussia. Slowing economic growth inChina, while not unexpected as thegovernment seeks to increase the relianceon domestic demand for the long term,further eroded investor sentiment. Fearsalso remain about the health of theproperty sector and the country’sbanking system as companies struggledwith tighter access to financing.Inside the portfolioThe fund’s investments in the health care,information technology and telecommunicationservices sectors were amongthe biggest contributors to returns.Shares of pharmaceutical firms NovoNordisk, Bayer and Novartis all postedgains and remain three of the fund’slargest holdings. Novo Nordisk continuesto provide strong results due to its longtermprospects in the diabetes market, aswell as in promising new areas such asblood-clotting agents. The company alsoannounced a dividend increase and ashare repurchase program, boostingpositive market sentiment.Among the fund’s technology holdings,Chinese internet companies Baidu andTencent recorded strong gains during theperiod, helped by growth in their mobileplatforms in areas such as online chat andvideo applications. Another Chineseinternet company, travel booking websiteCtrip.com International, advanced sharplyas it continued to gain share in a largeand growing market. Several Japanesecompanies also contributed to returns,including SoftBank and Rakuten, ane-commerce and internet company.SoftBank, one of the biggest telecomcompanies in Japan, continues to be alarge holding in the fund. It has benefitedfrom positive market sentiment about itsacquisition of U.S. mobile carrier Sprint,as well as strong results from its holdingsin Chinese internet company Alibaba,which is expected to go public in thecoming months. Alibaba and Tencent arejust two examples of companies withdisruptive technology that are reshapingthe retail industry in China with theire-commerce platforms; for more on theseand other companies that are disruptingtheir industries, see the feature articlestarting on page 6.Investments in the financials sector weremixed, even as some portfolio managersare increasing their exposure to banksamid signs of improvement. Severalbanks advanced as the recoverycontinued for the sector, including Bankof Ireland, Commerzbank and SociétéGénérale. Another French firm, insuranceprovider AXA, also posted strong gainsduring the period, as did British providerPrudential. However, another U.K.company, Barclays, was one of thebiggest detractors during the period.Shares of Russia’s Sberbank also fell amidthe ongoing tensions with Ukraine.Looking aheadWhile the global economic picture hasbrightened over the last year, the outlookremains mixed. In Europe, the economyhas stabilized and appears to be growingmodestly. However, consumer spendingand unemployment must improve ifgrowth is to accelerate and keep pace withinvestors’ expectations. The direction ofJapan’s economy remains uncertain butAbe still seems willing to make somestructural changes, as reflected by therecent agricultural trade deal withAustralia. This is crucial as a sustainedrecovery will depend on larger structuralreforms that will allow for higher wages andexports to grow the economy. Althoughseveral developing economies arestruggling and emerging markets are likelyto remain volatile in the near future, thegrowing consumer demand there shouldcontinue to create long-term investmentopportunities for the fund in companieswith exposure to those markets.Elsewhere, our portfolio managers arefinding attractively valued, well-managedcompanies in industries experiencinggrowing consumer and businessdemand, including auto parts andaerospace. They also have focused oncompanies that should be helped bytechnological innovations in areas suchas health care and e-commerce,including many that are disrupting theirrespective industries. Doing so hasallowed the fund to keep pace with thefast-moving market — or in the case ofthis past fiscal year, exceed it. Our sizegives us the scope and scale necessary toscour the whole world for opportunitiesand invest in the areas we find mostattractive. As always, we thank you, ourfellow investors, for your continuedsupport of EuroPacific Growth Fund.Sincerely,Michael ThawleyVice Chairman of the BoardCarl KawajaPresidentMay 12, 2014For current information about the fund,visit americanfunds.com.EuroPacific Growth Fund 3