After a bout of selling pressure at the beginning of the year, emerging markets bonds and currencies continued their rebound in the second quarter amid strong investor demand for higher-yielding assets. The European Central Bank's accommodative actions near the end of the quarter boosted investors' appetite for riskier debt, which helped extend the gains in emerging markets bonds. The rally overcame geopolitical tensions between Ukraine and Russia, a military takeover of Thailand's government, a flare-up of sectarian violence in Iraq, and a potential default on Argentina's sovereign debt. Emerging markets debt denominated in local currencies generally underperformed U.S. dollar-denominated bonds as a result of weakness in the currencies of some developing countries.
The Emerging Markets Local Currency Bond Fund returned 4.53% in the quarter compared with 4.02% for the J.P. Morgan GBI - EM Global Diversified. For the 12 months ended June 30, 2014, the fund returned 3.67% versus 3.91% 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 3.67% and 0.95%, respectively, as of June 30, 2014. 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.
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.
The fund's bond allocations and interest rate exposures are biased toward the higher-yielding emerging markets, including Brazil, South Africa, and Indonesia. We trimmed our exposure to Mexico after its debt had a strong run, and we also reduced our positions in Hungary and Turkey in favor of South Africa. In terms of currency positioning, we fund our overweight positions in emerging markets currencies that we think are poised to appreciate with underweights in developed markets currencies that appear to offer limited upside. Our outlook for healthy economic growth leads us to be overweight the Mexican peso and Polish zloty, and we are also overweight the Brazilian real as a result of the high interest rates available in Brazil.
We remain selectively positive on emerging markets debt and currencies as a result of the generally benign outlook for both economic growth and inflation in developing countries. With many key elections in emerging markets now behind us, we anticipate that growth in those markets will increase at least marginally. Although we believe that U.S. interest rates will rise, removing some of the demand for higher-yielding assets that has supported emerging markets bonds, we still think that cash flows into the asset class will remain healthy. Returns for emerging markets debt and currencies will likely moderate from their second-quarter pace and become increasingly differentiated between countries.