Emerging markets bonds denominated in local currencies generated strong returns in the first quarter, recovering from losses in January amid heightened risk aversion. A reversal in sentiment toward riskier asset classes in February, likely stemming from a rebound in oil prices and an increasingly dovish perception of the Federal Reserve, helped boost emerging markets debt prices in the second half of the quarter. In Brazil, which is a large issuer of emerging markets bonds, millions of people took to the streets to support the movement to impeach President Dilma Rousseff. Many emerging markets currencies, including the Brazilian real, which gained nearly 12%, appreciated sharply against the U.S. dollar.
The Emerging Markets Local Currency Bond Fund returned 9.66% in the quarter compared with 11.02% for the J.P. Morgan GBI - EM Global Diversified. For the 12 months ended March 31, 2016, the fund returned −2.91% versus −1.65% 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 −2.91% and −3.33%, respectively, as of March 31, 2016. The fund's expense ratio was 1.10% as of its fiscal year ended December 31, 2015.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
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 focus the portfolio's bond allocations in countries with attractive inflation-adjusted yields and the potential for monetary policy easing, including Hungary and South Korea. During the quarter, we added to our exposure to South African and Malaysian bonds as their relative value became more compelling. In terms of currency positioning, we concentrate on countries making structural reforms or experiencing healthy growth, including the Mexican peso and the Indonesian rupiah. The fund also has a long position in the Russian ruble versus the Turkish lira and the Colombian peso as a partial hedge against another round of oil price weakness. We maintain exposure to dollar- and euro-denominated emerging markets bonds, although we reduced the size of this allocation as the segment's relative value deteriorated.
The long-term fundamental drivers of emerging markets, including solid sovereign balance sheets and faster growth than developed countries, remain intact. However, individual developing nations could continue to face headwinds from weakness in commodity prices, political dysfunction, and slow economic growth. The relatively high yields of emerging markets bonds denominated in local currencies, paired with investment-grade credit ratings for many issuers, make the asset class attractive relative to others in the fixed income universe. We expect that economic and structural reforms will continue to progress in certain developing countries where there have been market-friendly election results, improving the credit quality of their sovereign bonds.