Emerging markets bonds denominated in local currencies generated positive returns in the second quarter, although they lagged the strong returns of emerging markets debt denominated in U.S. dollars as the greenback gained against most currencies of developing markets. An increase in commodity prices, accommodative central bank actions, signs of economic stability, and promising political developments improved investor sentiment. Very low yields in developed markets encouraged investor demand for higher-yielding assets, benefiting emerging markets bonds. Many emerging markets currencies fell against the U.S. dollar. For example, the Mexican peso was down more than 7% for the quarter, and the Polish zloty declined over 6%.
The Emerging Markets Local Currency Bond Fund returned 3.14% in the quarter compared with 2.71% for the J.P. Morgan GBI - EM Global Diversified. For the 12 months ended June 30, 2016, the fund returned 0.69% versus 1.99% for the J.P. Morgan GBI - EM Global Diversified. The fund's average annual total returns were 0.69%, −2.89%, and −2.58% for the 1-, 5-, and Since Inception (05/26/2011) periods, respectively, as of June 30, 2016. The fund's expense ratio was 1.10% as of its fiscal year ended December 31, 2015.
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The Emerging Markets Local Currency Bond Fund charges a 2%
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if it did, the performance would be lower.
We focus the portfolio's bond allocations in countries, including Hungary and Indonesia, with attractive inflation-adjusted yields and the potential for monetary policy easing. During the quarter, we added to our exposure to South African and Malaysian bonds as their relative value became more compelling. We also maintained an overweight to Brazilian debt in anticipation of potentially positive political change and lower inflation. In terms of currency positioning, we concentrated on countries making structural reforms or experiencing healthy growth, including the Mexican peso and the Indonesian rupiah. The fund also had an out-of-benchmark allocation to the Indian rupee as a result of our outlook for positive structural reforms in India. We also maintained a small exposure to dollar-denominated emerging markets bonds.
We anticipate that economic and structural reforms will continue to progress in certain developing countries where there have been market-friendly political developments, improving the credit quality of their sovereign bonds. 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. A key variable for emerging markets bonds going forward is the economic slowdown in China, where supportive policymaker actions have helped improve investor sentiment. We expect China's government to be able to control the country's deceleration in economic activity.