Emerging markets debt denominated in U.S. dollars posted solid returns in the first quarter of 2015, recovering from a downturn at the end of last year. Investment-grade sovereign bonds from developing countries notably outperformed noninvestment-grade emerging markets sovereigns, largely as a result of negative returns for bonds rated CCC and below. On the other hand, bonds with BB credit ratings generated strong returns. Moody's downgraded Petrobras, Brazil's huge state-run oil company that has been plagued by a corruption scandal, to below investment grade. By the end of the quarter, however, it appeared that Petrobras would be able to file financial reports accounting for bribes by April 30 and avoid a technical default.
The Emerging Markets Bond Fund returned 1.34% in the quarter compared with 2.06% for the J.P. Morgan Emerging Markets Bond Index Global and 0.81% for the Lipper Emerging Market Hard Currency Debt Funds Average. For the 12 months ended March 31, 2015, the fund returned 1.11% versus 4.08% for the J.P. Morgan Emerging Markets Bond Index Global and −0.25% for the Lipper Emerging Market Hard Currency Debt Funds Average. The fund's average annual total returns were 1.11%, 5.40%, and 7.52% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2015. 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 favor bonds issued by countries with strong recovery or reform themes that provide attractive valuations and low sensitivity to changes in U.S. interest rates, which are poised to rise as the Federal Reserve likely will begin to tighten monetary policy later this year. As a result, the portfolio is overweight in Brazil, where we think that a confluence of political and economic pressures will provide a catalyst for reform, more orthodox fiscal and monetary policies, and better governance at state-owned firms such as Petrobras. The portfolio is also overweight emerging markets corporate bonds, particularly those issued by companies that are likely to benefit from the rising purchasing power of middle class consumers in developing countries.
With fading political risk from last year's busy election cycle in developing countries and support from attractive valuations following the selling pressure on the asset class in the fourth quarter of last year, we have a positive long-term outlook for emerging markets bonds. The fundamental condition of many developing markets remains solid, and many have strong balance sheets and higher rates of economic growth than developed countries. However, over the short to medium term, we've taken a guarded stance given the risk of more negative headlines, and we will be monitoring oil prices for further signs of stabilization. In addition, we closely analyze liquidity conditions for bonds that we are considering for purchase or sale in the portfolio.