Emerging markets debt prices fell during the quarter, with bonds denominated in local currencies experiencing the steepest 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 Bond Fund returned −2.84% in the quarter compared with −1.65% for the J.P. Morgan Emerging Markets Bond Index Global and −2.02% for the Lipper Emerging Market Hard Currency Debt Funds Average. For the 12 months ended September 30, 2014, the fund returned 6.29% versus 8.28% for the J.P. Morgan Emerging Markets Bond Index Global and 6.10% for the Lipper Emerging Market Hard Currency Debt Funds Average. The fund's average annual total returns were 6.29%, 7.00%, and 8.46% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.94% 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 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.
We think that the U.S. dollar- and euro-denominated sovereign debt of emerging markets with higher credit quality appears to be overvalued, and it is relatively sensitive to the negative price effects of an increase in U.S. interest rates. Instead, we favor bonds issued by developing market corporations, particularly those that will likely benefit from the growing numbers of middle-class consumers in emerging markets. We also have holdings of select local currency bonds that present relative value, in some cases hedging the currency exposure. Given our outlook for ongoing strength in the U.S. dollar, the portfolio's exposure to emerging markets currencies is selective and modest overall.
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 in emerging markets. 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, attractive yields relative to developed markets, and diversification potential, remain intact after the third-quarter sell-off, and we are encouraged by the sector's long-term positive fundamentals.