Emerging markets bonds were roughly flat in the third quarter of 2013, with earlier losses offset by a sharp rally in September following the Fed's decision to delay tapering its asset purchases. Investor sentiment was negative for much of the period as slowing economic growth weighed on many emerging markets, while the developed world, notably the U.S., Japan, and Europe, delivered generally better-than-expected results. In addition, several emerging countries with high financing needs or poor balance of payments profiles came under significant pressure. Investors were also concerned about the potential wind down and eventual removal of easy monetary policy in the U.S. Emerging markets bonds rallied sharply after the Federal Reserve unexpectedly delayed tapering its asset purchase program.
The Emerging Markets Bond Fund returned 0.19% in the quarter compared with 0.87% for the J.P. Morgan Emerging Markets Bond Index Global. For the 12 months ended September 30, 2013, the fund returned −4.00% versus −4.34% for the J.P. Morgan Emerging Markets Bond Index Global. The fund's average annual total returns were −4.00%, 9.17%, and 9.03% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.94% as of its fiscal year ended December 31, 2012.
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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.
Our allocation to the Ukraine weighed on performance after the country's external sovereign credit rating was downgraded due to concerns about its relatively weak liquidity position, uncertainties regarding a new arrangement with the International Monetary Fund, and risks associated with a deteriorating trade relationship with Russia. Our exposure to Russia helped results as the country showed strength in the current market environment. Russia has several notable strengths that have supported bond prices, including fiscal discipline, a positive current account balance, and significant foreign exchange reserves. Our position in Chinese corporate debt was also beneficial. Despite signs of slower economic growth, China's manufacturing activity picked up for the first time since April 2013. Holdings in China's real estate sector led the outperformance.
The U.S. Federal Reserve's decision to delay the tapering of its asset purchase program has provided a near-term boost for emerging markets bonds. While this shot of adrenaline could give emerging countries with challenged current account balances additional time to implement needed structural reforms, volatility could reemerge as the Fed draws closer to an eventual reduction in its monetary accommodation. Amid ongoing adjustments in emerging and developed market fiscal and monetary policy, idiosyncratic risks persist and well-calculated security selection remains an important factor in limiting downside risk in client portfolios. Despite the near-term overhang of uncertainty in U.S. monetary policy, emerging markets debt maintains many of its attractive long-term qualities. Economic growth relative to developed markets, while not as fast as in prior years, remains strong, debt service capacity is high, and credit quality is solidly investment grade.