Emerging markets debt denominated in local currencies posted negative returns in U.S. dollar terms in the first quarter. The U.S. dollar strengthened against almost all emerging markets currencies during the period, hurting the performance of local currency bonds in terms of dollars, as the Federal Reserve moved closer to tightening monetary policy for the first time since 2006. In local currency terms, however, returns were mostly positive as decreasing yields on developed market government bonds led investors to seek higher yields in emerging markets. The currencies of countries perceived as most sensitive to changes in U.S. monetary policy, such as Mexico, or that rely on external financing to fund large current account deficits, such as Turkey, experienced the most selling pressure.
The Emerging Markets Local Currency Bond Fund returned −4.22% in the quarter compared with −3.96% for the J.P. Morgan GBI - EM Global Diversified. For the 12 months ended March 31, 2015, the fund returned −11.26% versus −11.14% 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 −11.26% and −3.44%, respectively, as of March 31, 2015. The fund's expense ratio was 1.48% as of its fiscal year ended December 31, 2013.
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Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
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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 trimmed the portfolio's holdings of Brazilian bonds in response to the concerns about the country's fiscal situation amid the scandal at state-owned oil company Petrobras, but the fund remains overweight Brazil relative to the benchmark. The portfolio is also overweight Mexican debt, where we expect the country's economy to benefit from structural reforms. On the other hand, we are underweight Thailand, where we think economic growth momentum will slow. In terms of currency positioning, we fund our overweights in select emerging markets currencies with developed market currencies such as the euro and the British pound. As with Mexican bonds, the portfolio is overweight the Mexican peso. We reduced our allocation to the Turkish lira amid concerns about the independence of Turkey's central bank.
The fundamentals of emerging markets debt issuers remain generally sound, with solid sovereign balance sheets and higher growth rates than most developed markets. Political sentiment in certain countries, such as India and Indonesia, has improved as a result of market-friendly election results in 2014. This should be supportive for structural reforms going forward. Moreover, with yields in developed markets so low compared with recent history, emerging markets local currency debt is also attractive from a relative value perspective. However, the prospect of the Fed raising U.S. interest rates later this year has the potential to increase volatility in emerging market bonds and currencies in the short term.