Emerging markets debt prices fell during the quarter, with bonds denominated in local currencies experiencing steep losses in dollar terms. Many emerging markets currencies dropped sharply against the U.S. dollar. Argentina defaulted on its debt for the second time in 13 years after a U.S. judge blocked the country from making coupon payments to some of its bondholders. However, investors had expected the default and it had little impact on other emerging markets. The European Union and the U.S. tightened their sanctions against Russia for its role in the Ukraine conflict, with the U.S. barring American companies from providing technology or services for Russian oil exploration.
The Emerging Markets Local Currency Bond Fund returned −5.62% in the quarter compared with −5.66% for the J.P. Morgan GBI - EM Global Diversified. For the 12 months ended September 30, 2014, the fund returned −1.29% versus −1.54% 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 −1.29% and −0.85%, respectively, as of September 30, 2014. The fund's expense ratio was 1.48% as of its fiscal year ended December 31, 2013.
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 bond allocations and interest rate exposures favor Latin America, where we think that valuations are still more compelling than in other regions. We also maintain an allocation to inflation-linked debt from countries such as Mexico and Brazil where it appears to offer value against expected inflation and nominal (not inflation-adjusted) yields. In terms of currency positioning, we fund our overweights in select emerging markets currencies that we think are poised to appreciate with underweights in currencies of either developed or emerging countries that appear to offer limited upside. We favor currencies that offer exposure to high interest rates, such as the Brazilian real, or countries that are making positive reforms, like the Mexican peso.
The outcomes of most major elections in developing countries have been relatively benign for investors, and going forward the focus will be on economic and structural reforms designed to boost slowing growth. We believe that some country-specific developments, such as the tensions between Russia and the West over Ukraine and Argentina's standoff with its holdout creditors, will continue, although they are likely to remain isolated with limited risk of contagion. Many of the attractive features of emerging markets debt, including solid credit quality and attractive yields relative to developed markets, remain intact. However, we expect the recent strength in the U.S. dollar to continue in the near term, which would weigh on the currencies of developing countries.