Emerging markets debt declined in U.S. dollar terms over the first quarter as slower growth in key economies, instability in the eurozone, and weaker currencies sapped investors' appetite for riskier assets. A slow but steady economic recovery and partial resolution of fiscal challenges in the U.S. supported risk sentiment earlier in the period, but this was more than offset by global uncertainties as the quarter progressed. Economic growth in China, Brazil, and other economies slumped noticeably, while Italy's election stalemate and Cyprus' controversial bank deposit tax highlighted ongoing challenges in the eurozone. Many developed and emerging markets currencies weakened against the U.S. dollar, which benefited from loose monetary policy in many global markets and its perceived safe-haven status.
The Emerging Markets Bond Fund returned −1.41% in the quarter compared with −2.30% for the J.P. Morgan Emerging Markets Bond Index Global and −0.68% for the Lipper Emerging Markets Debt Funds Average. For the 12 months ended March 31, 2013, the fund returned 10.38% versus 10.44% for the J.P. Morgan Emerging Markets Bond Index Global and 10.59% for the Lipper Emerging Markets Debt Funds Average. The fund's average annual total returns were 10.38%, 9.13%, and 11.15% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 0.94% as of its fiscal year ended December 31, 2011.
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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 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.
Security selection in Brazil and Mexico was a top contributor to the fund's strong performance, led by a preference for locally denominated debt and corporate bonds versus dollar-denominated sovereign debt. Mexico, in particular, continued to benefit from an improved regulatory environment and strong manufacturing tailwinds, while Brazilian corporate debt performed relatively well due to inflation concerns. Our underweight allocation to Argentina also aided results as the sovereign underperformed after default risk increased during the quarter. An underweight allocation to the Philippines detracted as the country's sovereign debt received its first independent investment-grade credit rating. Our exposure to quasi-sovereign debt in Indonesia also detracted from results.
We continue to have a favorable outlook for emerging markets debt, with a focus on corporate debt as a compelling way to gain exposure to the strong growth potential of many emerging economies. While fundamentals may be peaking in certain countries, the asset class features solid credit characteristics in comparison to many developed markets, including strong sovereign balance sheets, prudent fiscal policies, and resilient economic growth. This relative strength also offers central bank leaders and politicians a broader variety of policy tools to keep growth on track and contain inflation. We believe this will continue to drive secular capital flows into emerging debt markets and support bond prices over the long term.