Emerging markets bonds fell in January amid heightened risk aversion. However, a reversal in sentiment toward riskier asset classes in February, likely stemming from a rebound in oil prices and an increasingly dovish perception of the Federal Reserve, helped boost emerging markets debt prices in the second half of the quarter and led to strong returns. In Brazil, millions of people took to the streets to support the investigation into the massive corruption scandal involving partially state-owned oil company Petrobras as well as the movement to impeach President Dilma Rousseff. Many emerging markets currencies appreciated sharply against the U.S. dollar, leading to very strong returns on locally denominated emerging markets bonds in dollar terms.
The Emerging Markets Bond Fund returned 5.12% in the quarter compared with 5.22% for the J.P. Morgan Emerging Markets Bond Index Global and 4.53% for the Lipper Emerging Market Hard Currency Debt Funds Average. For the 12 months ended March 31, 2016, the fund returned 4.37% versus 4.36% for the J.P. Morgan Emerging Markets Bond Index Global and 0.50% for the Lipper Emerging Market Hard Currency Debt Funds Average. The fund's average annual total returns were 4.37%, 4.33%, and 6.15% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2016. The fund's expense ratio was 0.93% as of its fiscal year ended December 31, 2015.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
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 Fed tightens monetary policy. Our overweight allocation to Brazil contributed to returns amid volatility as investor optimism about the potential impeachment of Rousseff gained traction. The portfolio's exposure to Mexican quasi-sovereign debt also helped relative performance as oil prices stabilized, supporting the bonds. It's longer-maturity Mexican sovereign debt also performed well. The portfolio has a minor position in locally denominated emerging markets bonds with most of the local currency exposure hedged.
The long-term fundamental drivers of emerging markets, including stronger balance sheets and faster growth than developed countries, remain intact. However, individual developing nations could continue to face headwinds from weakness in commodity prices, political dysfunction, and slow economic growth. In the near term, the Fed tightening cycle may keep volatility elevated and reduce liquidity, but that could provide attractive entry points for emerging markets debt investors given our expectation for a gradual pace of Fed rate increases. We closely analyze liquidity conditions for bonds that we are considering for purchase or sale in the portfolio.