Emerging markets bonds denominated in local currencies were nearly unchanged in the fourth quarter as depreciation of most currencies of developing countries against the U.S. dollar offset gains from declining yields on emerging markets government bonds. Although the Federal Reserve made its first interest rate hike since 2006, the market for emerging markets bonds did not experience the downward pressure that some had predicted. Fitch Ratings downgraded Brazil's sovereign credit to noninvestment-grade status, joining Standard & Poor's in classifying the country's credit as junk. In South Africa, President Jacob Zuma twice dismissed the country's finance minister in December. The prices of oil and other commodities resumed their decline, putting pressure on emerging markets currencies in general.
The Emerging Markets Local Currency Bond Fund returned 0.43% in the quarter compared with −0.01% for the J.P. Morgan GBI - EM Global Diversified. For the 12 months ended December 31, 2015, the fund returned −15.20% versus −14.92% 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 −15.20% and −5.42%, respectively, as of December 31, 2015. The fund's expense ratio was 1.35% as of its fiscal year ended December 31, 2014.
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 favored bond positions include Mexico, which has stable politics and has made progress on structural reforms, and India, where economic reforms appear poised to advance further. We maintained an overweight to bonds from Russia, where we see the potential for further monetary easing. In terms of currency positioning, the Mexican peso remains a large overweight because its recent decline has made its valuation more attractive. The portfolio is also overweight the Chilean peso as a result of our belief that Chile's nearly balanced current account will help it outperform its Latin American peers. We also maintain exposure to dollar- and euro-denominated emerging markets bonds that provide attractive relative value.
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 economic and structural reforms will continue to progress in a number of developing countries where there have been market-friendly election results, improving the credit quality of their sovereign bonds.