Emerging market bonds denominated in local currencies generated losses during the quarter, primarily as a result of the depreciation in most currencies of developing countries against the U.S. dollar. Brazil's bonds and its currency, the real, were particularly volatile as incumbent Dilma Rousseff won the country's presidential election in October. The general malaise in global economic growth contributed to the selling pressure in emerging market bonds, and the rapid decline in oil prices triggered deep concerns about the health of major commodities exporters such as Russia and Venezuela. Russia's central bank hiked its benchmark lending rate by a staggering 7.5 percentage points in December in an effort to stabilize the plunging ruble.
The Emerging Markets Local Currency Bond Fund returned −6.10% in the quarter compared with −5.71% for the J.P. Morgan GBI - EM Global Diversified. For the 12 months ended December 31, 2014, the fund returned −5.80% versus −5.72% for the J.P. Morgan GBI - EM Global Diversified. The fund's 1-year and Since Inception (05/26/2011) average annual total returns were −5.80% and −2.51%, respectively, as of December 31, 2014. The fund's expense ratio was 1.48% as of its fiscal year ended December 31, 2013.
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The Emerging Markets Local Currency Bond Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
We lowered the overall interest rate sensitivity of the portfolio's bond holdings as the Federal Reserve prepares to raise interest rates, likely in mid-2015. Over the course of the quarter, we reduced our allocation to Peruvian debt and cut the interest rate sensitivity of the fund's Malaysian bond holdings. We increased the portfolio's exposure to debt from the Philippines and Turkey. In terms of currency positioning, we fund our overweights in select emerging markets currencies with a blend of emerging and developed market currencies. The portfolio's exposure to the U.S. dollar and currencies that are linked to it increased during the quarter. We also added to the fund's position in Asian currencies such as the Indian rupee.
Locally denominated emerging market bonds appear attractively valued relative to developed markets debt with similar credit quality. In addition, the recent selling pressure on emerging market currencies has resulted in inexpensive valuations relative to historical norms. We expect the strength of the U.S. dollar to continue over the near term, but the room for further gains could be limited as a result of the dollar's recent rapid appreciation. In the current low-yield environment, we remain focused on opportunities in the bonds and currencies of developing countries that can implement structural reforms to position themselves for economic growth.