Emerging markets bonds denominated in local currencies were roughly flat in the third quarter of 2013, with losses earlier in the quarter offset by a sharp rally in September following the Fed's decision to delay tapering its asset purchases. Investor sentiment was poor for much of the period amid concerns that less accommodative monetary policy in the U.S. would reduce global liquidity, but bond markets rallied sharply after the Federal Reserve unexpectedly delayed tapering its asset purchase program. Emerging markets currencies experienced a challenging quarter as just under half of the currencies in the index lost value against the U.S. dollar, negatively impacted by a general economic slowdown in emerging markets. Several emerging countries with high financing needs and/or poor balance of payments profiles came under significant pressure.
The Emerging Markets Local Currency Bond Fund returned −0.87% in the quarter compared with −0.43% for the J.P. Morgan GBI - EM Global Diversified. For the 12 months ended September 30, 2013, the fund returned −4.62% versus −3.74% 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 −4.62% and −0.66%, respectively, as of September 30, 2013. The fund's expense ratio was 1.65% as of its fiscal year ended December 31, 2012.
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.
Our currency positioning detracted from performance. We adopted a defensive position in currencies given our expectations that the less accommodative U.S. monetary policy would limit liquidity and increase outflows from emerging markets debt markets . However, the Fed's decision to delay tapering led to better-than-expected performance among many emerging markets currencies. Our current positioning is selective. We increased positions in the Brazilian real, Mexican peso, Nigerian naira, and Russian ruble compared with last quarter and hold non-benchmark allocations in the Sri Lankan rupee, Indian rupee, and Egyptian pound. Our largest underweight currency positions are in the emerging Europe, Middle East, and Africa (EMEA) region, where we are underweight to the Turkish lira and Hungarian forint. We prefer bonds in Latin America, where nominal and real yields are generally more attractive, and have an underweight to bonds in Asia and EMEA.
From a fundamental standpoint, the recent economic slowdown in emerging markets has opened up current account deficits, and many currencies have depreciated. In many cases, however, this brings valuations more in line with fundamentals. Although we expect the pace of future credit upgrades to be slower, we still expect credit quality convergence over the long run between emerging and developed markets. With the local currency emerging markets index already over 80% investment grade and offering a relatively high yield, we believe the asset class has an attractive risk/reward profile. The U.S. dollar has started to lose some of its strengthening momentum as political brinkmanship and bickering over the debt ceiling and other budget issues have taken some shine off the currency, providing room for non-U.S. dollar currencies to appreciate. In this period of heightened uncertainty, we will continue to leverage our global research platform to identify investment opportunities as they arise.