International bonds generated strong returns throughout the second quarter as yields on both developed and emerging markets debt fell. With yields in developed markets at or near record lows in a period of very low volatility, investor demand was highest for bonds with attractive yields such as Spanish and Italian sovereign debt. There was some dispersion of returns in currencies as about half of the major currencies performed well while the other half depreciated against the U.S. dollar. There was also significant divergence in the monetary policies of central banks across both developing and emerging markets.
The International Bond Fund returned 2.66% in the quarter compared with 2.72% for the Barclays Global Aggregate ex USD Bond Index and 2.68% for the Lipper International Income Funds Average. For the 12 months ended June 30, 2014, the fund returned 8.69% versus 9.42% for the Barclays Global Aggregate ex USD Bond Index and 7.34% for the Lipper International Income Funds Average. The fund's average annual total returns were 8.69%, 4.32%, and 4.68% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.83% as of its fiscal year ended December 31, 2013.
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 International 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.
In developed markets, the portfolio is underweight Canada and Japan, where bond valuations appear expensive, as well as Spain and France, where economic recovery seems to be lagging. We are overweight Ireland and Italy, whose economies are gaining more traction, and German government bonds, which are the premium low-risk assets in non-U.S. markets. We remain modestly overweight European investment-grade corporates, focusing on the financials sector, but reduced our allocation to European high yield. We increased our exposure to dollar- and euro-denominated emerging markets sovereigns, and we continue to like local-currency Mexican bonds as a result of the country's relatively aggressive economic and structural reforms. The fund remains underweight developed-market currencies, such as the euro and the yen, and overweight selected emerging markets currencies, including the Mexican peso and the Polish zloty.
Because of the divergence in interest rate policy paths in developed markets, with the European Central Bank and the Bank of Japan continuing to ease while the Federal Reserve prepares to tighten, there will likely be opportunities for relative value trading between markets at different points in their interest rate cycles. Uncertainty about the timing of the rate moves, however, could introduce some volatility into short-maturity debt markets and create attractive trading opportunities. While many emerging markets currencies are now cheap compared with their long-term valuations and offer good risk-adjusted yields, country-by-country currency analysis and selection remains essential.