Emerging markets bonds endured a volatile quarter, dropping in January before retracing those losses and finishing the period with significant gains. While several emerging markets currencies sold off steeply at the beginning of the year, countries including Turkey, India, and Brazil aggressively raised interest rates. This action stabilized their currencies and benefited investor confidence. The standoff between Russia and the West over Crimea did not result in a sustained sell-off in emerging markets bonds, and the March announcement of a two-year International Monetary Fund financing package for Ukraine helped boost Ukrainian debt.
The Emerging Markets Local Currency Bond Fund returned 1.68% in the quarter compared with 1.90% for the J.P. Morgan GBI - EM Global Diversified. For the 12 months ended March 31, 2014, the fund returned −8.60% versus −7.14% 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 −8.60% and −0.53%, respectively, as of March 31, 2014. The fund's expense ratio was 1.65% as of its fiscal year ended December 31, 2012.
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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 look for bonds and currencies of emerging countries that have their own drivers of economic growth, making them less reliant on commodities demand from China or on economic expansion in developed markets. This leads us to favor locally denominated debt issued in Mexico, Colombia, and South Africa, for example. We are also overweight to emerging markets bonds denominated in U.S. dollars. In terms of currency positioning, we fund our overweight positions in currencies that we think are poised to appreciate, with underweights in those that appear to offer limited upside. For example, we are overweight to the Polish zloty and the Mexican peso, funding these positions with underweights to developed market currencies such as the euro as well as the currencies of developing nations such as Thailand and Turkey.
Investors in emerging markets debt and currencies now appear to be more focused on economic growth and elections in developing countries later in 2014 than on the effects of Federal Reserve tapering. We expect continued volatility in the near term. However, many emerging markets have strong balance sheets and higher growth potential relative to developed countries, so the long-term fundamental drivers of the asset class remain intact. We also expect to see increasing differentiation between the returns of the bonds and currencies of individual developing countries as investors make more distinctions between emerging markets.