After a bout of selling pressure at the beginning of the year, emerging markets bonds 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 U.S. dollars outperformed local currency bonds as a result of weakness in the currencies of some developing countries.
The Emerging Markets Bond Fund returned 5.38% in the quarter compared with 5.43% for the J.P. Morgan Emerging Markets Bond Index Global and 4.74% for the Lipper Emerging Market Hard Currency Debt Funds Average. For the 12 months ended June 30, 2014, the fund returned 9.61% versus 11.05% for the J.P. Morgan Emerging Markets Bond Index Global and 8.90% for the Lipper Emerging Market Hard Currency Debt Funds Average. The fund's average annual total returns were 9.61%, 10.21%, and 9.70% for the 1-, 5-, and 10-year periods, respectively, as of June 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 are also finding compelling value in some local currency bonds versus dollar-denominated debt. Given our outlook for a stronger U.S. dollar, exposure to emerging markets currencies is selective and modest overall.
Based on improving economic growth rates in developing countries, fading investor worries about election cycles, and supportive valuations, our overall outlook for emerging markets bonds remains favorable. However, there are several idiosyncratic, country-by-country issues, such as the standoff between Argentina and the holdout creditors that did not participate in the restructuring of its defaulted debt, and more will likely appear. Investor demand for emerging markets bonds is recovering, although inflows will likely become more discriminating by country. Many emerging markets have strong balance sheets and higher growth potential relative to developed countries, so the long-term fundamental drivers of the segment remain intact.